Nvidia's stock has gained 6.4% after announcing the new GeForce RTX 40 SUPER series of graphics processing units (GPUs) at the CES 2024 technology show. These are expected to improve performance in gaming and generative AI. Examples of AI applications to robots from Boston Dynamics and Collaborative Robots, transforming human-robot interactions, were presented by Nvidia's vice president of robotics. While this information sounds promising, it is worth considering whether Nvidia shares can still be an attractive investment. To assess this, it is important to focus on the current valuation because, according to the teachings of Professor Aswath Damodaran, 'keep your eyes on the price' before making investment decisions.
Table of contents:
- Nvidia's current successes
- How big a success is the market currently pricing for Nvidia?
- Is Nvidia stock a good investment?
Nvidia's current successes
There is no denying the success the company has achieved, which is perfectly illustrated by the record-breaking results from the latest financial report for Q3 2023. Revenue reached an impressive $18.12 billion, up 206% year-on-year and 34% quarter-on-quarter. Net profit recorded an increase of more than 12 times year-on-year and 50% from the second quarter. This, in turn, contributed to setting a record net profit margin of 42%, the highest in the company's history, in contrast to the industry average of 17.3%. The company's return on equity (ROE) now stands at an impressive 70.4%, compared to an industry average of 13%. These metrics are clear evidence of Nvidia's strong competitive dominance in the market.
This success has occurred despite a decline in the debt-to-equity (D/E) ratio, which has fallen from a relatively safe level of 0.45 to 0.25. The company does not appear to be facing any significant problems in settling its current liabilities, as the company's strict quick ratio (QR) is 3.1. This means that the company would be able to live on its funds alone for around three years.
Source: Macrotrends
How big a success is the market currently pricing for Nvidia?
Regardless of a company's current success, let us remember that investing is about buying assets below their intrinsic value. It is worth recalling the definition of value from a financial perspective in this context. The value of an asset is the present value of all future returns from that asset to the investor. Currently, the expected (discount) rate of return for Nvidia is 16.32% and the reinvestment rate has remained at 10.07% over the past four quarters. This means that as much as 89.93% of the company's profits are distributed to shareholders in various forms. With these assumptions in mind, Nvidia's current projected annual earnings growth rate through the market is as high as 51.9% for the next five years, after which we assume a partial saturation of the AI market and a decline in the growth rate to 4.86%.
Source: Conotoxia's own analysis
Is Nvidia stock a good investment?
Despite the huge success we are currently seeing, Nvidia's average annual earnings growth rate over the past 10 years is 27%. To assess whether the company's current valuation is overvalued, we need to consider how likely we are to forecast average annual earnings growth of around 52% over the next 5 years. Such growth would mean that Nvidia's valuation after 5 years would be around $18 trillion, more than 6 times the current value of the world's largest company Apple.
Source: Conotoxia MT5, NVIDIA, Daily
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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